Analysis

5 Noncompete Developments To Watch For As 2020 Ends

By Danielle Nichole Smith
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Law360 (September 10, 2020, 3:50 PM EDT) -- With a recent California high court ruling on how a state law affects business contracts, a Computer Fraud and Abuse Act case pending before the U.S. Supreme Court and the impact of COVID-19, there are plenty of developments for employee mobility attorneys to watch out for in the home stretch of 2020. 

Here, Law360 looks at five issues worth keeping an eye on.

California High Court Tackles Business Contracts Question

Many attorneys in the noncompete space are watching for the fallout from the California Supreme Court's August ruling on the question of whether a law generally prohibiting enforcing noncompetes against Golden State workers applies to business contracts as well.

In Ixchel Pharma LLC v. Biogen Inc. , the California high court found that contracts between businesses are, like employee noncompete agreements, subject to Section 16600 of the California Business and Professional Code, which prohibits competitors from restraining trade.

However, the court also held that a settlement agreement between Biogen and Forward Pharma requiring Forward to end a collaboration with Ixchel didn't automatically violate Section 16600, but should instead be analyzed under the "rule of reason" applied to antitrust claims under the Cartwright Act, California's main antitrust law.

"We need to see how the courts are interpreting this decision, not only the direct holding of the decision, but also some of the dicta talking about noncompete agreements entered into in the employment realm," said Jennifer S. Baldocchi, the co-chair of Paul Hastings LLP's employment department and chair of the firm's international employee mobility and trade secrets practice.

Baldocchi noted that while there's been a lot of attention on the court's ruling regarding Section 16600, the court's findings on contract interference claims are "equally important." In its suit, Ixchel accused Biogen of illegally restraining trade in violation of Section 16600 and tortiously interfering with its contract with Forward. 

The state high court ruled that plaintiffs, such as Ixchel, bringing tortious interference claims over at-will agreements have to show that some independent wrongdoing occurred. Not requiring independent wrongdoing "risks chilling legitimate business competition," the court said.

"It was really interesting for the court to come out in that way, given the tension there with the prohibition on covenants not to compete, because allowing interference with contracts when you have at-will relationships of course is somewhat of a restriction on competition," Baldocchi said.

The case is Ixchel Pharma LLC v. Biogen Inc., case number S256927, in the California Supreme Court.

Circuit Split on CFAA Nears End

The U.S. Supreme Court is finally set to weigh in on the scope of the Computer Fraud and Abuse Act in Van Buren v. United States, a case taken up by the justices in April that could provide some clarity for attorneys who work on issues surrounding trade secrets.

Currently, the circuit courts are divided on whether individuals who are allowed to access a computer system break the law if their conduct violates the system owner's policies or contractual restrictions for that use, a question that has implications for trade secret misappropriation claims.

While the Second, Fourth and Ninth Circuits have taken a narrow view of the law and only allow CFAA claims where someone lacked authorization, the First, Fifth, Seventh and Eleventh Circuits have allowed claims where someone misused information even if they had access to the material.

Clifford Atlas of Jackson Lewis PC, who co-leads the firm's noncompetes and protection against unfair competition practice group, said that the circuit split developed pretty quickly after the CFAA was enacted in 1986.

"One of the reasons why I think people were trying to expand the scope of the Computer Fraud and Abuse Act and have it interpreted broadly is to permit people a federal forum to hear these claims," Atlas said. "It's a federal statute, you can get into federal court with it, and you can bring along all of your state law claims under supplemental jurisdiction. So it became very useful as a tool."

However, Atlas pointed out that the CFAA became less important in that regard after former President Barack Obama signed the Defend Trade Secrets Act in 2016, which allows for civil claims in federal court.

"The extent to which people use the CFAA as a hook to get into federal court is not as important today now that the Defend Trade Secrets Act is there and provides that in an easier way," he said.

Peter A. Steinmeyer, who co-leads Epstein Becker Green's trade secrets and employee mobility strategic initiative, said that though the Supreme Court's decision won't be as significant given the DTSA, it will still be nice to have the issue cleared up.

"Lawyers have spent hundreds and thousands of hours briefing CFAA issues, myself included, and parsing the circuit split and even district court splits within given jurisdictions over the meaning of the CFAA," Steinmeyer said. "So it will be nice to finally get clarity and put some of that to rest."

The case is Van Buren v. United States, case number 19-783, in the U.S. Supreme Court.

Courts Parse Choice-of-Law Provisions in Contracts

Cases over choice-of-law provisions in restrictive covenants will also likely capture attorneys' attention in the coming months, as courts continue to interpret contracts to see which state's law should govern when a dispute arises.

Such provisions can be included in contracts to specify what jurisdiction's law should apply. Because state laws on noncompetes and other restrictive covenants vary so greatly, which law is applied in any given case can really have an impact on the outcome, attorneys noted. For instance, while Delaware is considered to be fairly friendly towards enforcing restrictive covenants, doing so in California is known to be more difficult.

"We're always watching developments in choice-of-law," Paul Hastings' Baldocchi said. "The procedural issues of deciding which state's law applies are critical to this practice."

In April, the First Circuit handed NuVasive a win when it found that a Delaware choice-of-law provision applied and upheld a preliminary injunction enforcing a nonsolicitation and noncompete agreement that a worker signed with the medical device company. The court found that NuVasive's incorporation in Delaware is a substantial enough relationship to invoke the state's laws in a contract and that recent Massachusetts reforms of noncompete law weren't in play since the worker signed his agreement before they took effect.

But the Third Circuit ruled the same month that sporting goods retailer Cabela's LLC couldn't block former workers from using proprietary information elsewhere because the agreements they signed ran afoul of Nebraska law, even though the company brought its suit in Delaware.

The panel said the district court properly identified a conflict between "Delaware's fundamental policy in upholding the freedom of contract" and "Nebraska's fundamental policy of not enforcing contracts that prohibit ordinary competition." That both the execution of the agreements and alleged breaches, among other things, took place in Nebraska showed that the Cornhusker State had a "materially greater interest" in applying its laws to the agreements, the Third Circuit held.

"It's an interesting and noteworthy case because so many companies are incorporated in Delaware, and so employers should be mindful of where their employees actually work when they're having them sign these noncompetes," Steinmeyer said.

The cases are NuVasive Inc. v. Day, case number 19-1611, in the U.S. Court of Appeals for the First Circuit, and Cabela's LLC v. Matthew Highby et al., case number 19-1423, in the U.S. Court of Appeals for the Third Circuit.

FTC Urged to Take Action on Noncompetes

In January, the Federal Trade Commission perked attorneys' ears when it hosted a workshop on a possible rulemaking to limit employers' use of noncompetes in contracts with their workers followed by a request for public comment.

A coalition of 19 attorneys general wrote to the FTC in March, urging the agency to step in and "address the abusive use of [covenants not to compete] in the workplace." But since the coronavirus pandemic struck, the agency has been largely silent on the potential rulemaking.

"That's all kind of still in limbo, but we definitely would be expecting some FTC action down the pike," said Tom Wallerstein of Venable LLP. "I think everything's kind of on hold because of the election and COVID, and no one's really going to do anything until they see how that all shakes out."

Wallerstein noted that the FTC and U.S. Department of Justice warned employers in April that the agencies will be "on alert" for anti-competitive conduct that harms workers, including noncompetes. Sens. Elizabeth Warren, D-Mass., and Chris Murphy, D-Conn., wrote to the FTC in July, asking the agency to "take immediate action" to protect workers from harmful noncompetes during the pandemic and to finalize the rule discussed earlier in the year.

Federal bills related to noncompetes floated before the pandemic struck also seem to still be on the table.

In October, Sens. Chris Murphy, D-Conn., and Todd Young, R-Ind., introduced the Workforce Mobility Act, which would ban noncompetes unless they're part of the sale of a business. And Sen. Marco Rubio, R-Fla., in January 2019 proposed the Freedom to Compete Act, which would amend the Fair Labor Standards Act to block employers from enforcing agreements against workers who aren't exempt from overtime as managers.

Attorneys should also be closely watching state legislation in the area, Baldocchi said, pointing out that there has been an "almost an unprecedented amount of activity at the state level" in the past 18 months or so limiting or banning restrictive covenants in some way.

For instance, Virginia in April passed a law prohibiting noncompete agreements for workers who are considered low-wage under the statute, following in the footsteps of other states, such as Massachusetts, Washington and Maryland, that have made similar moves.

James Gale, co-chair of intellectual property litigation at Cozen O'Connor, said he also expects to see an increase in computer fraud and abuse statutes at the state level, which are "being adopted at a pretty rapid pace."

COVID-19's Effects Remain to Be Seen

The coronavirus pandemic is also expected to leave a mark as the economic fallout from the crisis impacts employee mobility and presents novel questions for the courts to decide.

Gale said that he thinks the pandemic will drive up the number of cases over restrictive covenants and trade secret theft.

"I think you're going to be seeing more mobility as a result of layoffs from COVID and that's going to give rise to an increase in enforcement of covenants not to compete," Gale said.

And employee mobility may be put on hold by the outbreak, Epstein Becker's Steinmeyer suggested.

"I haven't seen any statistics, but anecdotally, my sense is that there has been less employee mobility among senior people because of COVID, and it's the movement of senior people that tends to lead the litigation," Steinmeyer said. "What will be interesting to see is, is there pent-up demand for movement, and will we see that either toward the end of this year or early next year."

COVID-19 has also raised questions about how employee furloughs or staff reductions during the pandemic affect restrictive covenants, Jackson Lewis' Atlas said.

"Is a furlough a termination from employment, and will placing someone on a furlough trigger the running of a restrictive covenant which says that it runs for a period of year after employment ends? I don't know the answer to that question, and we're waiting to see cases like that," he said.

Atlas noted that one district court already tackled the issue in Schuylkill Valley Sports Inc. v. Corporate Images Co. A Pennsylvania federal judge ruled in that case that Schuylkill Valley Sports couldn't enforce noncompete and nonsolicitation clauses against workers because it terminated their employment, even though the company characterized the layoffs as furloughs.

"The environment that we're in given the pandemic, given the economic fallout, the high unemployment rates, I think that all of this is going to have an impact on how courts are going to deal with a restrictive covenant," Atlas said.

The case is Schuylkill Valley Sports Inc. v. Corporate Images Co. et al, case number 5:20-cv-02332, in the U.S. District Court for the Eastern District of Pennsylvania

--Additional reporting by Allison Grande, Dorothy Atkins, Brian Dowling, Christopher Cole, Nadia Dreid, Dave Simpson, Braden Campbell and Kevin Stawicki. Editing by Alanna Weissman.

For a reprint of this article, please contact reprints@law360.com.

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Related Sections

Case Information

Case Title

Cabelas LLC v. Matthew Highby


Case Number

19-1423

Court

Appellate - 3rd Circuit

Nature of Suit

4190 Other Contract Actions

Date Filed

February 26, 2019


Case Title

NuVasive, Inc. v. Day


Case Number

19-1611

Court

Appellate - 1st Circuit

Nature of Suit

4190 Other Contract

Date Filed

June 19, 2019


Case Title

Nathan Van Buren, Petitioner v. United States


Case Number

19-783

Court

Supreme Court

Nature of Suit

Date Filed

December 18, 2019


Case Title

SCHUYLKILL VALLEY SPORTS, INC. v. CORPORATE IMAGES CO. et al


Case Number

5:20-cv-02332

Court

Pennsylvania Eastern

Nature of Suit

Other Statutes: Other Statutory Actions

Judge

JOSEPH F. LEESON, JR

Date Filed

May 18, 2020

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